Canada Dollar Drops as Carney Reduces Economic-Growth Forecast

April 17 (Bloomberg) -- The Canadian dollar weakened to the
lowest level in a month versus its U.S. counterpart after the
Bank of Canada reduced its growth forecast for 2013 and said
economic slack will persist for more than two years.

The currency fell after the central bank lowered its 2013
growth forecast to 1.5 percent from the 2 percent it had
predicted in January, after recent data in Canada, China and the
U.S. trailed forecasts. Governor Mark Carney kept unchanged both
his policy interest rate at 1 percent and his bias to tighten
even as he lowered his growth forecast.

“Although the modest withdrawal aspect is left in the
statement, the slashed growth and inflation forecasts leave
plenty of room for Canadian dollar rates to price rate cuts down
the line,” Shahab Jalinoos, a senior currency strategist for
UBS AG in Stamford, Connecticut, said in an e-mail. “Broader
issues like falling commodity prices” will propel the Canadian
dollar lower, he said.

The loonie, as the Canadian dollar is known for the image
of the aquatic bird on the C$1 coin, fell 0.6 percent to
C$1.0265 per U.S. dollar at 5 p.m. in Toronto. The currency
weakened to as low as C$1.0294, the least since March 13. One
loonie buys 97.42 U.S. cents.

The Bank of Canada will announce additional details
tomorrow about an April 24 auction of securities maturing in
2015.

The yield on December 2013 bankers’ acceptances, a measure
of interest-rate expectations, fell to the lowest since March
21, the day the Canadian government announced its 2013 budget
and the last time it pared its growth forecast. The yield on the
notes fell to 1.22 percent.

So-called Bax contracts have settled an average of about 17
basis points above the central bank’s target rate since 1992,
data compiled by Bloomberg show.

Carney’s reduced forecast follows the International
Monetary Fund, which yesterday lowered its forecast to 1.5
percent from 2 percent and said Canada’s growth will be the
slowest in the Group of 20 outside Europe.

Central Bank

“The members of the Bank of Canada have clearly followed
the lead of many central bankers and the market as a whole in
developing a more cautious stance on the pace of global growth
in 2013,” Adrian Miller, director of fixed-income strategy at
GMP Securities LLC, said in a note to clients. “The downward
pressure on commodity prices that is likely to persist over the
near term has resulted in a slight pause in growth
expectations.”

Job data in Canada and the U.S., along with U.S. retail
sales and first quarter gross domestic product growth in China
have all come in below the median forecast in Bloomberg surveys
of economists since the beginning of April.

Higher rates could trigger further gains in Canada’s
dollar, which the central bank said is already hurting exports
because of the dollar’s strength. The currency is also elevated
because of haven flows and the impact of loose monetary policies
elsewhere, the bank’s report said.

Rate Path

“They really want rates to be higher, but they’re
constrained by the economic slack and the persistently high
currency,” said Ed Devlin, head of Canadian portfolio
management team at Pacific Investment Management Co., which runs
the world’s largest bond fund. “When they have this tightening
bias they’re speaking more to the average Canadian,” in an
effort to curb consumer borrowing, than to participants in the
currency and bond markets, he said. Devlin said he favors eight-to 12-year Canadian government bonds.

Foreign investors fleeing lower rates in the U.S. and
Japan, where unprecedented monetary stimulus is depressing
yields, have buffered the loonie’s drop this year. International
investors in February bought C$5.25 billion of Canadian debt
instruments, with a net C$8.01 billion purchase of bonds
compared with sales of C$2.76 billion of money-market
securities, Statistics Canada reported April 16.

The Canadian dollar had its biggest daily drop in more than
a year on April 15, tumbling 1.2 percent as gold led a slide in
commodities after China’s economic growth slowed more than
forecast in the first quarter.

Gold futures, down 17 percent this year, fell to a two-year
low of $1,321.50 an ounce yesterday on growing optimism that an
economic recovery will curb demand for a protection of wealth.
The metal slumped 13 percent in the two sessions through April
15, the most since January 1980.

Crude oil, the nation’s largest export, fell for the fourth
time in five days, dropping as much as 3 percent to $86.06 a
barrel in New York.

The Canadian dollar has declined 0.9 percent this year
against nine other developed nation currencies tracked by the
Bloomberg Correlation Weighted Index. The U.S. dollar rose 3
percent.